King’s alarm signals more stimulus on cards for UK

SummaryBank of England governor Mervyn King’s alarm over the danger posed by Europe’s debt crisis suggests officials may be ready to add more stimulus as soon as next month to shield Britain from further turmoil.

Bank of England governor Mervyn King’s alarm over the danger posed by Europe’s debt crisis suggests officials may be ready to add more stimulus as soon as next month to shield Britain from further turmoil.

King added his voice to growing global frustration with Europe’s inability to tame its crisis, saying failure to deal with it would lead to “significant adverse consequences.” The Bank of England cut its growth and inflation forecasts, a month after raising its bond-purchase target by £75 billion ($118 billion) to aid the recovery.

“We’re on the knife-edge of another recession,” said Richard Barwell, an economist at Royal Bank of Scotland Group in London and a former Bank of England official. “They’re increasingly coming to the conclusion that there’s more weakness in the UK than they thought. We originally forecast another £50 billion in February. They could easily bring that forward.”

US President Barack Obama said that the financial market turmoil will continue until European leaders persuade investors they have a convincing plan. As Europe dithers on a solution and the crisis darkens prospects for global growth, King warned there are limits to what central banks can do to stem its knock-on effects and said there is “no meaningful way” to quantify a worst-case scenario.

The current round of bond purchases through so-called quantitative easing is due to end in early February. Jamie Dannhauser, an economist at Lombard Street Research in London said a move before then is possible. Michael Saunders, chief European economist at Citigroup in London, also said the central bank may not wait to increase the target.

It “may be announced at the December or January meetings — especially if data are weak and financial markets remain strained,” Saunders said.

The Bank of England’s nine policy makers voted unanimously to increase QE in October. They left the target unchanged on November 10, and minutes to be published on November 23 will show whether any officials voted for more stimulus at that meeting.

The central bank sees inflation, which was 5% in October, at about 1.5% in two years, according to forecasts published on Wednesday in its quarterly Inflation Report.

Nomura International Plc changed its QE forecast after the new projections were published. It sees the central bank expanding stimulus by £50 billion in February and 25 billion pounds in May. It previously predicted one 25 billion- pound increase in February.